AMAZON IN TALKS TO SET UP MOVIE DOWNLOAD SERVICE

After Music and TV Shows, Movies Are Next Frontier for Digital Content

NEW YORK (AdAge.com) -- Just like iTunes did with TV content a mere four months ago, Amazon is set to upend the movie distribution business with a move many have long expected: a digital download service.

Amazon is close to launching such a service and is in talks with several major movie studios, including Universal Pictures, Viacom’s Paramount and Time Warner’s Warner Bros., about making content available on its site for rental and purchase.

Kept mum until now
Many Internet watchers have long suspected Amazon would enter the space, but the company’s executives have kept mum about specifics. CEO Jeff Bezos has talked about the importance of a digital media play but shrugged off talking details. Of course, the news comes hot on the heels of Amazon’s announcement that it would create a digital music service to compete with market leader iTunes. The digital music industry, while still small, is growing rapidly.

“I’ve been waiting for this shoe to drop for a long time,” said Phil Leigh, president of market research firm Inside Digital Media. “It was inevitable, because it’s the paragon example of the perfect kind of merchandise to sell at Amazon. It can be digitized, there’s no need for inventory, physical handling, shipment. ... It’ll be impossible to overestimate the impact of this.”

According to Piper Jaffrey Senior Analyst Safa Rashtchy, Amazon has been working on its digital initiative for at least a year. “You can certainly expect Amazon has to do this,” he said, noting that 75% of its revenue comes from media sales. “Over time everyone knows that all of these things will be transferred digitally and as a purveyor of media it has to have a digital strategy. It’s a little late to the game with music, so the movie category is an important one to get ahead.”

A happy studio exec
However, one studio was happy to trumpet its efforts to digitize its movies. Steve Beeks, president of Lions Gate Entertainment, noted in a recent earnings call that his company expects to begin to see some activity in the next fiscal year from digital delivery media.

“We are in active negotiations with several digital distribution entities, including Google, Yahoo, Vongo, Apple, NetFlix, Amazon, CinemaNow and Movielink,” he said, “and we anticipate agreements with many of them soon. ... We’re at the very beginning of an exciting technological revolution in which consumers can access programming in many new ways, creating new avenues for us to monetize our library assets.”

Of course, critical success hinges on the relationships Amazon can build with the studios. Rights agreements still need to be worked out and a way found around the resistance of studios, which have created healthy revenue streams out of DVD sales. Digital media, Mr. Rashtchy said, boasts much lower margins. Still, as ABC’s deal with Apple’s iTunes jump-started digital downloads among TV networks, signing a major studio could spark a move among movies studios.

Mr. Leigh thinks movie studio cooperation is inevitable.

Rebuilding the fortress
“Their fortress is going to have to be rebuilt,” he said. “The Internet is essentially eroding that fortress through things like Bittorrent and high-speed Internet.”

The Amazon move also poses a major competitive threat to Netflix, which has long been interested in shifting to digital downloads. In a recent earnings call Netflix CEO Reed Hastings addressed competition from Blockbuster and, potentially, Amazon.com. “This large and growing market appears to have room for multiple players,” he said. From a technology standpoint, he said he’s most worried about Amazon.

Additionally the movie download market is limited by bandwidth and the extraordinarily long time it takes to download a full-length feature film. Downloading a 44-minute episode of ABC’s “Lost” on iTunes, for example, can take up to 15 minutes.

We’re still in the very early stages of digital distribution, warned Mr. Rashtchy. “Don’t expect by next year for this to have a major impact. ... That’s why we’re staying positive on Netflix,” he said.